WAEC SSCE - Economics - 2010

Maelezo ya Majibu

When the demand for a good is fairly inelastic, it means that consumers are not very sensitive to changes in the price of the good. In this case, if the government imposes an indirect tax on the good, the burden of the tax will mostly fall on the consumers of the good. This is because consumers will continue to buy the good even if the price increases due to the tax, and therefore will end up paying most of the tax. The sellers may bear some of the burden of the tax if they are unable to pass on the entire tax to consumers in the form of a higher price. However, since the demand is fairly inelastic, they will be able to pass on most of the tax to consumers. Therefore, the correct answer is "more on the consumers of the goods".

Maelezo ya Majibu

Maelezo ya Majibu

The national debt of a country is the total amount of money that the government owes to its creditors. This includes all forms of government borrowing, such as selling treasury bills, bonds, and other securities. Therefore, the component of the national debt of a country is treasury bills.

Maelezo ya Majibu

Cameroon is not a member of the Economic Community of West African States (ECOWAS). While Cameroon is located in West Africa, it is not geographically within the region defined as ECOWAS. Additionally, Cameroon is a member of the Economic and Monetary Community of Central Africa (CEMAC) which is a separate regional economic community in Africa.

Maelezo ya Majibu

One disadvantage of direct taxes is that they can be evaded. Direct taxes are taxes that are levied directly on individuals or organizations, such as income tax or property tax. One way in which direct taxes can be evaded is through tax evasion, which is the illegal non-payment or underpayment of taxes. People may try to evade taxes by hiding income or assets, underreporting income, or claiming false deductions, for example. Tax evasion can lead to a loss of revenue for the government, which can have negative impacts on public services and infrastructure. Additionally, it can create an unfair burden on those who do pay their taxes, as they may end up paying more to make up for the lost revenue from tax evaders. While efforts can be made to reduce tax evasion, such as through increased enforcement and penalties, it remains a potential disadvantage of direct taxes.

Maelezo ya Majibu

The role of government in promoting agricultural development does not include paying the wages of farmers. This is because paying the wages of farmers is not a sustainable way of promoting agricultural development, as it does not address the root causes of agricultural challenges. Instead, the government focuses on establishing and funding research, formulation of policies, and provision of rural infrastructures, among other measures, to promote agricultural development. These measures aim to improve productivity, increase yields, and enhance the overall efficiency of the agricultural sector. Ultimately, the government's goal is to ensure food security and promote economic growth through agriculture.

Maelezo ya Majibu

The correct option is: TC = FC + VC. Total cost (TC) is the sum of fixed cost (FC) and variable cost (VC). Fixed costs are those costs that remain constant irrespective of the level of production, such as rent, salaries, and insurance. Variable costs, on the other hand, vary with the level of production, such as the cost of raw materials, labor, and energy. Therefore, the total cost of producing a certain quantity of goods or services is the sum of these two costs. So, the equation that correctly represents the relationship between total cost, fixed cost, and variable cost is TC = FC + VC.

Maelezo ya Majibu

In a perfect market, the price of a product is determined by the intersection of the demand and supply curve, and all firms produce an identical product. In such a market, there is perfect information, no barriers to entry or exit, and no externalities. Also, there are a large number of buyers and sellers in the market. Based on these assumptions, the only option that is obtainable in a perfect market is P = MR = MC. This is because in a perfect market, firms are price takers, and the price (P) is equal to the marginal revenue (MR) of the firm, which is also equal to the marginal cost (MC) of production.

Maelezo ya Majibu

A firm is said to be a public joint stock company when it sells its shares to members of the public. In a public joint stock company, the capital of the firm is divided into shares, which are sold to members of the public. The shareholders are the owners of the company, and they share in the profits and losses of the company. The shares of a public joint stock company are traded on a stock exchange, and the value of the shares can fluctuate depending on the performance of the company. Unlike a private joint stock company, a public joint stock company is subject to more stringent regulatory requirements and is required to disclose more information to the public.

Maelezo ya Majibu

Goods for which demand rises as income rises are called normal goods. As consumers' income increases, they tend to purchase more of these goods. Examples of normal goods include luxury items such as expensive jewelry or high-end vehicles, as well as everyday items such as clothing and household appliances.

Maelezo ya Majibu

Maelezo ya Majibu

Demand-pull inflation occurs when there is too much demand for goods and services relative to the supply available, leading to a rise in prices. One of the best ways to combat this type of inflation is to reduce demand by reducing overall spending in the economy. Out of the options listed, the best way to combat demand-pull inflation would be to increase income taxes. This reduces disposable income, meaning people will have less money to spend on goods and services, which will reduce overall demand. On the other hand, reducing income taxes or increasing salaries and wages will increase disposable income and encourage spending, leading to higher demand and potentially worsening demand-pull inflation. Similarly, increasing import duties would only affect the prices of imported goods and not necessarily address the root cause of the inflation.

Maelezo ya Majibu

The reason for holding money refers to the purpose or motive behind keeping money aside instead of spending it immediately. Ostentation is not a reason for holding money because it refers to the act of showing off wealth or possessions rather than actually holding on to money. Speculation is a reason for holding money because some people hold money in order to buy assets or investments that they believe will increase in value. Transactions is also a reason for holding money because people need money to carry out daily transactions such as buying goods and services. Precautionary is another reason for holding money because people may hold money in case of emergencies or unexpected expenses.

Maelezo ya Majibu

The slope of a supply curve is positive. A supply curve is a graphical representation of the relationship between the quantity of a good or service that a producer is willing to offer for sale and the price of that good or service. The slope of the supply curve indicates how much the quantity supplied changes when the price changes. In general, the higher the price of a good or service, the more the producer is willing to supply. Therefore, the supply curve slopes upward from left to right, indicating a positive slope.

Maelezo ya Majibu

A tent-making factory offers indirect services. This means that they produce a product, which in this case is tents, that can be used by customers for various purposes such as camping, outdoor events, or shelter. The factory does not provide personal services, such as tailoring or customization of the tents for individual customers. They also do not offer social services or reflex services, which are typically related to healthcare or personal care.

Maelezo ya Majibu

The economic system that is characterized by mostly private ownership of resources and individual decision making is the capitalist system. In a capitalist system, resources such as land, labor, and capital are privately owned and individuals have the freedom to make their own economic decisions, including what to produce, how to produce it, and how to distribute it. The market forces of supply and demand determine prices and the allocation of resources, and the government plays a limited role in the economy.

Maelezo ya Majibu

The correct answer is "Capital account; current account and monetary movement account". The balance of payments is a record of all the economic transactions between the residents of a country and the rest of the world over a given period of time. It has two main components: the current account and the capital account, and the monetary movement account is sometimes also included. The current account records trade in goods and services, income flows, and unilateral transfers, while the capital account records capital flows such as foreign direct investment and portfolio investment. The monetary movement account records changes in a country's monetary reserves. Therefore, the group of accounts that make up the balance of payments are the capital account, current account, and monetary movement account.

Maelezo ya Majibu

The advantage of a Sole Proprietorship over other forms of business organization is that it allows the owner to keep their affairs private. This means that the owner does not have to share information about their business with anyone else, and they have complete control over how the business is run. Additionally, there is no requirement to share profits or decision-making power with anyone else, which can result in greater flexibility and autonomy for the owner. However, a Sole Proprietorship may not necessarily be the best option for every business, as it also has limitations in terms of raising capital and sharing liability.

Maelezo ya Majibu

The public sector of an economy includes nationalized industries. These are businesses or organizations that are owned and operated by the government or state, and are responsible for providing essential goods and services to the public, such as healthcare, education, transportation, and utilities. Nationalized industries are different from joint stock companies, which are owned by private individuals or organizations, and cooperative societies, which are owned and operated by their members. Pressure groups, on the other hand, are organizations that seek to influence government policy or public opinion on a particular issue, but are not part of the public sector of the economy.

Maelezo ya Majibu

Inflation is a sustained increase in the general price level of goods and services in an economy over a period of time. When there is inflation, the value of money decreases, and this can have adverse effects on an economy. One way inflation can adversely affect a country's economy is through a fall in real income. As prices increase, the purchasing power of individuals decreases, making it more difficult for them to afford goods and services. This can lead to a decrease in overall consumer spending, which can then lead to a decrease in business profits and employment opportunities. Additionally, if inflation is high and volatile, it can create uncertainty and unpredictability in the economy, making it difficult for businesses to plan for the future and make long-term investments. This can further harm economic growth and stability. Therefore, inflation can negatively impact an economy in a number of ways, including a fall in real income.

Maelezo ya Majibu

Maelezo ya Majibu

The function of the Central Bank as the lender of last resort means that when all other sources fail, commercial banks can raise loans from the Central Bank. This is because commercial banks sometimes face temporary liquidity shortages or runs by depositors, which can threaten their solvency. As a result, the Central Bank acts as the lender of last resort by providing emergency loans to these banks to meet their short-term liquidity needs and avoid a systemic crisis. The Central Bank charges a high interest rate for such loans to discourage commercial banks from making a habit of borrowing from the Central Bank, and to encourage them to maintain adequate liquidity levels.

Maelezo ya Majibu

Collective bargaining is an efficient weapon used in resolving disputes between employers and employees. Collective bargaining is a process of negotiation between employers and a group of employees aimed at reaching agreements that regulate working conditions. It involves discussions and negotiations between the representatives of the employees and the employers, usually mediated by a neutral third party. The aim is to reach a mutually acceptable agreement that addresses the concerns of both parties. Collective bargaining is a more effective and peaceful way of resolving disputes because it involves a negotiation process that allows both parties to discuss their concerns and come to a mutual understanding. Display of placards and legal action, on the other hand, may be seen as confrontational and may lead to a breakdown of communication between the parties.

Maelezo ya Majibu

The reward to land as a factor of production is rent. Rent is the payment made to the owner of a piece of land or other natural resources for the use of that resource in the production of goods or services. It is a return on the natural resources which are not produced by humans but exist in nature, such as land, minerals, oil, and gas.

Maelezo ya Majibu

Bank notes are a legal tender. Legal tender refers to any form of payment that is recognized by law as a means to settle a debt or financial obligation. Bank notes are issued by the central bank of a country and are considered to be a form of currency that is widely accepted as a means of payment for goods and services. This means that when you use bank notes to pay for something, the person you are paying must accept them as payment. Bank overdrafts, bills of exchange, and money orders are not legal tender. Bank overdrafts are a type of credit that allows you to spend more money than you have in your bank account, but they are not considered a form of payment. Bills of exchange are similar to checks and are used to transfer money between two parties, but they are not considered a legal tender. Money orders are a type of payment that can be used to transfer money, but they are not legal tender.

Maelezo ya Majibu

Double counting overestimates the value of national income. Double counting occurs when the value of an intermediate good is included in the value of the final good. It leads to an overestimation of the national income as the value of the intermediate good is counted more than once. For example, if the value of the car is included in both the value of the tires and the value of the car, it leads to double counting and an overestimation of national income.

Maelezo ya Majibu

The Central Bank is responsible for managing a country's monetary policy and financial system. One of its primary functions is the issuance and regulation of the nation's currency. The Central Bank ensures that there is sufficient currency in circulation and that the money supply is stable. It also acts as a banker to the government, manages the country's foreign reserves, supervises commercial banks, and acts as a lender of last resort during financial crises. However, the Central Bank is not involved in the production of goods, presenting budgets, or printing of cheque books.

Maelezo ya Majibu

The sum of items divided by the number of items is called the mean. The mean is a type of average that is commonly used to describe a set of data. To find the mean, you add up all the values in the set and then divide by the total number of values. For example, if you have a set of three numbers - 2, 4, and 6 - the sum of these numbers is 12. Dividing 12 by 3 (the number of items) gives you a mean of 4. This means that the average value in this set of numbers is 4. The mean is a useful tool for summarizing data because it gives you an idea of what the typical value in a set of numbers is.

Maelezo ya Majibu

The Central Bank is responsible for controlling the money supply in an economy to achieve its monetary policy objectives. This is done through a variety of tools, including lending to the public, setting the bank rate, imposing legal reserve requirements, and conducting open market operations. Out of the options provided, the Central Bank does not control money supply through lending to the public. While the Central Bank may lend money to commercial banks or other financial institutions, it does not directly lend to the public. Instead, the Central Bank controls the money supply through the other options listed. The bank rate is the interest rate at which the Central Bank lends money to commercial banks, and changes to the bank rate can influence the cost of borrowing and the level of economic activity. Legal reserve requirements are the amount of money that banks are required to hold in reserve, and changes to these requirements can affect the amount of money that banks have available to lend. Finally, open market operations involve the buying and selling of government securities, which can influence the amount of money in circulation in the economy. Therefore, the Central Bank controls money supply through bank rate, legal reserve requirements, and open market operations, but not through lending directly to the public.

Maelezo ya Majibu

Maelezo ya Majibu

Dumping means selling a product or good in a foreign market at a price that is below the home market price. In other words, it is selling a product at a price that is lower than what it is sold for in its domestic market. This practice can lead to various economic effects, such as anti-dumping laws and retaliatory measures by the affected country to protect its industries.

Maelezo ya Majibu

The total stock of money available for use in an economy is the supply of money. The supply of money refers to the total amount of money available for use in an economy at a given time. This includes physical currency, such as banknotes and coins, as well as digital forms of money, such as bank deposits and electronic transfers. The supply of money is an important concept in economics because it affects the level of economic activity, inflation, and interest rates. Central banks are responsible for managing the supply of money in an economy to promote economic growth and stability.

Maelezo ya Majibu

Equilibrium price is the price at which quantity demanded is equal to quantity supplied. In other words, it is the point where the demand and supply curves intersect. At this price, there is no excess supply or excess demand in the market, and the market is said to be in a state of equilibrium. If the price is set above the equilibrium price, then the quantity supplied will be greater than the quantity demanded, leading to a surplus. Conversely, if the price is set below the equilibrium price, then the quantity demanded will be greater than the quantity supplied, leading to a shortage. Thus, the equilibrium price is the point of balance in the market where both buyers and sellers are satisfied.

Maelezo ya Majibu

An economic good is a product or service that has value and can be traded or sold in a market. It is something that people are willing to pay for because it satisfies a need or a want. Out of the options provided, the example of "air" is not an economic good because it is not scarce and has no economic value in most cases. While air is essential for life, it is generally available in abundance and free of charge. Therefore, it is not a product that people typically buy and sell in a market, and it is not considered an economic good. On the other hand, bottled water, household utensils, and shelter are all examples of economic goods because they have value, are scarce, and people are willing to pay for them to satisfy their needs and wants.

Maelezo ya Majibu

An underpopulated country is a country whose population size is too small relative to its resources. This means that the country has more resources than it has people to utilize them. As a result, the country may experience underutilization of resources and a lack of economic growth. An underpopulated country may also have a low labor force, which can lead to low productivity and slow economic growth.

Maelezo ya Majibu

The answer to the question is "cooperative loans." A joint-stock company can raise funds through the issuance of shares, debentures, and bank loans. However, cooperative loans are not a source of finance to a joint-stock company. Cooperative loans are usually provided to cooperative societies, not joint-stock companies. Cooperative societies are different from joint-stock companies in terms of their ownership structure and operations. Cooperative societies are owned and operated by their members, while joint-stock companies are owned by shareholders who may not be involved in the day-to-day operations of the company. Therefore, cooperative loans cannot be a source of finance to a joint-stock company.

Maelezo ya Majibu

Greater inter-dependence among workers in production is associated with division of labour. Division of labour refers to the separation of a work process into a number of tasks, with each task performed by a separate worker or group of workers. When each worker specializes in a particular task, they become highly skilled and efficient in that task, and the result is increased productivity and greater inter-dependence among workers. This allows for the efficient use of resources, time, and expertise, leading to increased output and economic growth.

Maelezo ya Majibu

Large scale agriculture has various advantages, including the use of sophisticated implements, an increase in employment, and integration of crops and animal farming. However, the use of simple implements is not an advantage of large scale agriculture. In fact, large scale agriculture often requires the use of advanced machinery and equipment to increase efficiency and productivity. The use of simple implements may be associated with small scale agriculture, which has its own set of advantages and disadvantages.

Maelezo ya Majibu

The law of diminishing marginal utility states that the more a commodity is consumed, the lower the rate of increase in the total utility derived from it. In simpler terms, it means that as you consume more of a good, the additional satisfaction or utility you get from consuming each additional unit will decrease. For example, if you eat one slice of pizza, you may really enjoy it and get a lot of satisfaction. But if you eat five slices, you may not enjoy the last slice as much as the first slice, and may even start feeling sick. This is because the marginal utility of each additional slice of pizza decreases as you consume more of them.

Maelezo ya Majibu

At the highest level of total utility, the marginal utility is zero. This is because total utility is the sum of marginal utilities, and when marginal utility reaches zero, it means that the consumer has reached the highest level of satisfaction they can derive from consuming that particular good or service. After this point, any additional units consumed will not increase the total utility, hence the marginal utility is zero. Therefore, the answer is option D: zero.

Maelezo ya Majibu

The World Health Organization (WHO) is not an international economic organization. The WHO is a specialized agency of the United Nations that is primarily focused on international public health issues, such as disease control and prevention, health promotion, and health system development. On the other hand, the Economic Commission for Africa (ECA), African Development Bank (ADB), and International Monetary Fund (IMF) are all international economic organizations. The ECA is a regional body of the United Nations that aims to promote economic and social development in Africa. The ADB is a multilateral development finance institution that provides loans, grants, and technical assistance to support economic development in Africa. The IMF is an international organization that works to promote global financial stability and facilitate international trade by providing financial assistance to member countries and promoting economic cooperation.

Maelezo ya Majibu

In order to stabilize oil prices in the world market, there is a need for OPEC members to adhere to production quotas. This means that OPEC members agree to limit their oil production to a certain amount, which helps to control the overall supply of oil in the market. When the supply of oil is limited, prices tend to increase due to higher demand. By working together to limit production, OPEC members can help to prevent wild fluctuations in oil prices, which can be beneficial for both producers and consumers. Encouraging competition among themselves or fixing the price of non-oil products would not necessarily address the issue of stabilizing oil prices. Additionally, always having a budget deficit is not a requirement or a solution for stabilizing oil prices.

Maelezo ya Majibu

A country's balance of payment is deficit when its total payment for visible and invisible imports are greater than its total receipts from its exports of visible and invisible goods. In other words, the country is spending more on buying goods and services from other countries than it is earning from selling its own goods and services to other countries. This leads to a negative balance of payment, which indicates a deficit.

Maelezo ya Majibu

The appropriate equation for determining the Net Domestic Product (NDP) is NDP = GDP - depreciation. Gross Domestic Product (GDP) is the total value of goods and services produced within a country's borders in a given period. However, this value includes the depreciation of capital goods, which refers to the decrease in value of assets due to wear and tear or obsolescence. To calculate the value of goods and services produced without the effect of depreciation, we need to subtract it from GDP. This gives us the Net Domestic Product (NDP), which is the value of goods and services produced within a country's borders minus the value of depreciation. The other equations presented are not appropriate for determining NDP: - NDP = GNP - depreciation refers to Gross National Product (GNP), which includes the income earned by a country's citizens abroad. It does not relate directly to the calculation of NDP. - NDP = GDP + Net Income from abroad refers to Gross National Income (GNI), which is GDP plus net income from abroad. This equation does not account for depreciation, and does not provide a direct calculation of NDP. - NDP = GDP * Net Income from abroad is not a recognized equation for calculating NDP, and does not account for depreciation.

Maelezo ya Majibu

If the supply of a good decreases while the demand for that good stays the same, there will be fewer goods available to satisfy the same level of demand. This creates a situation where buyers are willing to pay more for the limited supply of the good, which drives up the price. Therefore, the equilibrium price of the good will rise.

Maelezo ya Majibu

The concept of "Domestic National Products (DNP)" is not a concept in National Income Accounting. In National Income Accounting, GDP (Gross Domestic Product), GNP (Gross National Product), and NDP (Net Domestic Product) are measures of a country's economic performance. GDP is the total value of goods and services produced within a country's borders, GNP includes the total value of goods and services produced by a country's citizens and businesses, regardless of their location, and NDP is the total value of goods and services produced within a country's borders minus depreciation. Therefore, the correct option is "Domestic National Products (DNP)".

Maelezo ya Majibu

To find the median of a set of scores, we need to arrange the scores in order from lowest to highest. 6, 5, 8, 9, 10 The median is the middle value. In this case, the middle value is 8. Therefore, the answer is 8.

Maelezo ya Majibu

The minimum wage rate is not a factor determining the location of industry. Minimum wage is the minimum amount of money that employers are required by law to pay their workers for the work they do. Although it is an important consideration for businesses in terms of managing costs, it is not a factor that would determine where to locate a business. The other three factors mentioned are all important considerations for determining the location of an industry. Availability of labour is important because businesses need access to a skilled workforce to operate efficiently. Nearness of raw materials is important because it reduces transportation costs and ensures a reliable supply chain. Proximity to the market is important because it reduces transportation costs and ensures that products can be delivered to customers in a timely and cost-effective manner.

Maelezo ya Majibu

(a) Two functions of money.

• (i) Measure of value (unit of account). Money serves as a common denominator in which the value or price of every good and service is expressed. Because all prices are quoted in the same money unit, buyers and sellers can compare the values of different goods easily and keep accounts.
• (ii) Store of value. Money can be saved and held now and used to buy goods and services in the future. It allows people to keep their wealth in a convenient, liquid form and to separate the act of selling from the act of buying over time.

(b) How inflation affects these two functions. Inflation is a persistent rise in the general price level, which means a fall in the purchasing power of money.

• On money as a measure of value: when prices keep rising, the money unit no longer measures value consistently, one naira buys less this month than last month. Money becomes an unreliable, shifting measuring rod, so it becomes hard to compare values over time and to plan or keep meaningful accounts.
• On money as a store of value: inflation erodes purchasing power, so money saved today loses value by the time it is spent. Holding wealth in money brings a real loss, which discourages saving in money form and pushes people to hold goods, property or foreign currency instead.

Examination takeaway: the single idea linking both effects is that inflation reduces the purchasing power of money; explain how that instability spoils money both as a yardstick of value and as a way of storing value.

Maelezo ya Majibu

(a) Partnership. A partnership is a business association of between two and twenty persons (two and ten for banking) who agree to pool their capital and skills to carry on a lawful business in common with the aim of making and sharing profit. Their rights and duties are usually set out in a written agreement called the deed of partnership.

(b) Two advantages of a partnership:

• More capital. Because several partners contribute, a partnership can raise more capital than a one-man business, allowing larger operations.
• Combined skills and shared responsibility. Partners bring different talents and share the work, risks and losses, so decisions can be better and the burden on any one person is lighter.

Two disadvantages of a partnership:

• Unlimited liability. General partners are personally liable for the debts of the firm; if the business fails, their private property can be seized to settle debts.
• Disagreement and lack of continuity. Differences of opinion among partners can delay decisions and disrupt the business, and the partnership may be dissolved on the death, insanity or withdrawal of a partner.

Examination takeaway: define a partnership by its numbers (2 to 20), its shared capital and profit motive, and remember that unlimited liability is the disadvantage most often expected in the answer.

Maelezo ya Majibu

(a) Privatisation. Privatisation is the transfer of the ownership, control and management of a public (government-owned) enterprise, wholly or in part, from the government to private individuals or the private sector, usually by selling its shares to the public.

(b) Four reasons for government participation in economic activities:

• To provide essential and social services. Government provides services such as water, electricity, roads, education and health that private firms may neglect because they are not very profitable but are vital to the public.
• To provide public and merit goods. Goods like defence, street lighting and public security will not be supplied adequately by private firms, so the government must provide them.
• To prevent private monopoly and exploitation. By running key utilities itself, the government stops private monopolists from charging excessive prices for essential services.
• To undertake ventures that need huge capital. Some projects (refineries, steel plants, railways) require capital and long payback periods beyond the reach of private investors, so the government steps in.

(Other acceptable reasons: to create employment, to earn revenue, for national security and strategic control, and to promote balanced regional development.)

Examination takeaway: note the contrast between the two parts, privatisation reduces the government's role, while part (b) asks why the government takes on economic roles in the first place; answer each on its own terms.

Maelezo ya Majibu

(a) Commercial bank. A commercial bank is a financial institution that accepts deposits from the public, keeps them safe, and lends or invests them, giving loans and advances and creating credit, while operating with the aim of making profit. It also provides services such as the transfer of money and the operation of current, savings and fixed-deposit accounts.

(b) Four ways the Central Bank controls credit given by commercial banks.

• Open market operations (OMO). The Central Bank buys or sells government securities in the money market. Selling securities takes cash out of the banks and reduces their ability to lend (credit contracts); buying securities puts cash into the banks and increases lending (credit expands).
• Bank (discount) rate policy. This is the rate at which the Central Bank lends to commercial banks. Raising the rate makes borrowing dearer, so banks raise their own lending rates and lending falls; lowering it encourages more lending.
• Cash (reserve) ratio requirement. The Central Bank fixes the minimum fraction of deposits banks must keep as reserves. Raising the required ratio leaves banks with less to lend, contracting credit; lowering it frees funds for more lending.
• Special directives and moral suasion. The Central Bank may issue directives or special deposit calls, or appeal to the banks (moral suasion) to restrain or expand lending in particular sectors.

Examination takeaway: for each instrument state the tool and then the direction, how a tightening move (sell securities, raise the bank rate, raise the reserve ratio) reduces the banks' capacity to create credit.

Maelezo ya Majibu

(a) Fixed cost. Fixed cost is the total cost when output is zero, because it does not vary with output. From the table, at 0 crates total cost is \$50, so fixed cost = \$50.

(b)(i) Marginal cost at each level, \( MC = TC_n - TC_{n-1} \):

(b)(ii) Profit-maximising output. A firm maximises profit where marginal cost equals price (which is the marginal revenue for a price taker). The price of a crate is \$21, and \( MC = \$21 \) at an output of 4 crates. So the profit-maximising output is 4 crates: beyond this, each extra crate costs more to produce (\$29, \$37, ...) than the \$21 it earns.

(c) The demand curve. Because the price stays at \$21 no matter how much the farm sells, the farm is a price taker in a perfectly competitive market. Its demand curve is a horizontal (perfectly elastic) straight line drawn at the price level \$21 on the vertical (price) axis, running parallel to the quantity axis. This same line is the firm's average revenue and marginal revenue curve.

Maelezo ya Majibu

(a) Location versus localisation of industries. Location of industry refers to the particular place or site where a single industry or firm is established, together with the factors (nearness to raw materials, market, labour, power, transport) that decide the choice of that site. Localisation of industry refers to the concentration or clustering of many firms of the same industry in one particular area. In short, location deals with where one industry sites itself, while localisation deals with many similar industries grouping together in the same district.

(b) Locating industries in rural areas.

Three advantages:

• Cheap and available land. Land in rural areas is plentiful and cheaper, so factories can be built and expanded at lower cost.
• Cheap labour and nearness to raw materials. Rural labour is often cheaper, and agro-based industries can be sited close to their farm raw materials, cutting transport costs.
• Reduced congestion and pollution, and more even development. Siting industry in rural areas relieves urban overcrowding and helps spread development, reducing rural-urban migration.

Two disadvantages:

• Poor infrastructure. Rural areas often lack good roads, electricity, water and communication, which raises costs and hampers production.
• Shortage of skilled labour and small local market. Skilled workers prefer towns, and the low rural population and income mean a small local market for the output.

Examination takeaway: keep the distinction sharp, one firm's site (location) against the clustering of many similar firms (localisation), and back each rural advantage or disadvantage with a short reason.

Maelezo ya Majibu

(a) Types of production.

• (i) Primary production. This is the extractive stage, obtaining raw materials directly from nature. Examples: farming, fishing, mining, lumbering and hunting.
• (ii) Secondary production. This is the manufacturing and construction stage, in which raw materials from the primary stage are processed or transformed into finished and semi-finished goods. Examples: baking bread, building houses, assembling cars and refining crude oil.
• (iii) Tertiary production. This is the provision of services (commercial and direct) that help move goods to consumers and satisfy wants. Examples: teaching, banking, transport, trading, nursing and insurance.

(b) Why primary production predominates in developing countries.

• Abundant natural resources and land. Developing countries are richly endowed with fertile land, minerals and forests, which makes extractive activity the easiest and cheapest to undertake.
• Shortage of capital and technology. Manufacturing needs large amounts of capital, machinery and technical know-how, which these countries lack, so they concentrate on the less capital-intensive primary activities.

(Other acceptable reasons include a shortage of skilled manpower, a small domestic market for manufactures, and a ready overseas market for raw materials, a legacy of colonial trade patterns.)

Examination takeaway: for each type give a clear definition and examples, and for part (b) explain why the reason leads to primary dominance rather than just naming resources.

Maelezo ya Majibu

Marginal utility is the change in total utility from one more bottle: \( MU_n = TU_n - TU_{n-1} \). We use this to fill every gap.

(a) Finding the missing figures

• F (MU of the 2nd bottle) \( = 29 - 15 = \mathbf{14} \).
• Check: MU of 3rd \( = 42 - 29 = 13 \) (agrees with the table).
• D (TU of the 4th bottle): MU is 12, so \( D = 42 + 12 = \mathbf{54} \).
• G (MU of the 5th bottle) \( = 65 - 54 = \mathbf{11} \).
• H (MU of the 6th bottle) \( = 75 - 65 = \mathbf{10} \).
• E (TU of the 7th bottle): MU is 0, so \( E = 75 + 0 = \mathbf{75} \).

(b) The demand curve. Since a consumer buys extra units only if the price falls to match the (declining) marginal utility, plot marginal utility on the vertical axis and quantity of bottles on the horizontal axis, and join the points (1, 15), (2, 14), (3, 13), (4, 12), (5, 11), (6, 10), (7, 0). The curve slopes downward from left to right, which is the traveller's demand curve for Coca-Cola.

(c) Law of diminishing marginal utility. The law states that as more units of a good are consumed, the extra satisfaction from each additional unit falls. In the table MU falls steadily (15, 14, 13, 12, 11, 10, 0). Because a rational consumer pays a price equal to the marginal utility of the last unit, this falling MU means the consumer will buy more only at lower prices, which is exactly why the demand curve slopes downward.

Maelezo ya Majibu

(a) Incidence of tax. The incidence of a tax is the final resting place of the tax burden, that is, the person or group who ultimately bears and pays the tax and cannot pass it on to anyone else. It should be distinguished from the impact of a tax, which is on the person who first pays it to the government; the impact and incidence fall on the same person only when the tax cannot be shifted.

(b) Four principles (canons) of taxation.

• Equity (ability to pay). A tax should be fair, taking into account the taxpayer's ability to pay, so that those with higher incomes pay more.
• Certainty. The amount, time and manner of payment should be clear and known in advance to the taxpayer, not arbitrary.
• Convenience. A tax should be collected at a time and in a manner most convenient for the taxpayer, for example, deducting income tax when salaries are paid.
• Economy. The cost of collecting the tax should be small relative to the revenue it yields, so that most of what is collected reaches the treasury.

(Other acceptable principles include flexibility, simplicity, neutrality and productivity.)

Examination takeaway: keep impact (first payer) separate from incidence (final bearer), and for each canon give the principle plus a one-line reason for it.

Maelezo ya Majibu

When a producer sells more, the extra output can only be sold at a lower price, so he moves down his demand curve. Whether total sales revenue \( (R = P \times Q) \) rises or falls depends on the price elasticity of demand for the product, that is, on how strongly quantity demanded responds to the price change.

(a) When an increase in output decreases sales revenue. This happens when demand is price-inelastic \( (E_d < 1) \). Here a fall in price brings only a smaller proportionate rise in quantity demanded. Because price falls by more (in proportion) than quantity rises, the loss from the lower price outweighs the gain from the extra sales, so total revenue falls. For example, if raising output forces price down by 20% but quantity sold rises by only 5%, revenue drops. This is typical of necessities such as staple foodstuffs.

(b) When an increase in output increases sales revenue. This happens when demand is price-elastic \( (E_d > 1) \). Here a fall in price brings a larger proportionate rise in quantity demanded. The gain from the many extra units more than makes up for the lower price on each unit, so total revenue rises. For example, if price falls by 5% but quantity sold rises by 20%, revenue increases. This is typical of luxuries and goods with close substitutes.

On a diagram, revenue is the rectangle \( P \times Q \) under the demand curve. On a steep (inelastic) demand curve the rectangle shrinks as we move down; on a flat (elastic) demand curve it grows.

Examination takeaway: tie the direction of the revenue change to elasticity, revenue and price move together when demand is inelastic, and revenue and price move in opposite directions (revenue rises as output rises) when demand is elastic.

Maelezo ya Majibu

(a) Increase in supply. An increase in supply means that producers are willing and able to offer more of a good at every price, caused by factors other than the good's own price (for example, improved technology, a fall in the cost of inputs, more producers, or good weather). On a diagram it is shown as a rightward shift of the whole supply curve. It must be distinguished from an extension of supply, which is a movement along a fixed supply curve caused only by a rise in the good's own price.

(b) Effect of an increase in the supply of fish on the price of beef. Fish and beef are substitutes, that is, either can be used in place of the other. The effect works in two connected markets.

• In the fish market: the increase in supply shifts the supply curve of fish to the right. With demand unchanged, the equilibrium moves down along the demand curve, so the price of fish falls and the quantity of fish traded rises.
• In the beef market: because fish is now cheaper, consumers switch away from beef towards fish. This reduces the demand for beef, shifting the demand curve for beef to the left. With supply of beef unchanged, the new equilibrium is at a lower price of beef and a smaller quantity of beef traded.

So an increase in the supply of fish, by lowering the price of fish (a substitute), causes the demand for beef to fall and the price of beef to fall.

Examination takeaway: keep the two markets separate, a supply shift in the fish market versus a demand shift in the beef market, and state clearly that fish and beef are substitutes, which is the link that carries the effect across.

Maelezo ya Majibu

(a) Equilibrium of a consumer. A consumer is in equilibrium when, given his fixed income and the ruling prices of goods, he has spent his income in the way that yields him the maximum total satisfaction (utility), so that he has no incentive to change his pattern of spending.

(b) How a consumer attains equilibrium. There are two standard explanations.

Using marginal utility (the equi-marginal principle). A consumer buying several goods maximises satisfaction by arranging his spending so that the marginal utility of the last unit of money spent on each good is equal. That is, he equalises the marginal utility per naira across all goods:

\[ \frac{MU_x}{P_x} = \frac{MU_y}{P_y} = \cdots = MU_m \]

where \( MU_x, MU_y \) are the marginal utilities of goods \( x \) and \( y \), \( P_x, P_y \) their prices, and \( MU_m \) the marginal utility of money. If a naira spent on one good gave more satisfaction than a naira spent on another, he would transfer spending to the first good; because marginal utility diminishes, this transfer continues until the ratios are equal, at which point total satisfaction is greatest and he is in equilibrium.

Using indifference curves. The consumer is in equilibrium at the point where his budget line is tangent to the highest attainable indifference curve. At that point the slope of the indifference curve (the marginal rate of substitution) equals the slope of the budget line (the price ratio):

\[ MRS_{xy} = \frac{P_x}{P_y} \]

Here he is on the highest indifference curve his income allows, so satisfaction is maximised.

Examination takeaway: state the condition as a formula and explain the adjustment process, the consumer keeps shifting spending until the marginal utility per naira is equal everywhere; that equalising is what "attaining equilibrium" means.